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3 Top Ranked Consumer ETFs to Buy Now - ETF News And Commentary

The market is shaping up pretty nicely for consumer stocks as
we approach the second half of the year. We have seen strong data
in a number of key areas that are important to the consumer,
suggesting that a continuation of the bull run could take place
in this important market segment.

After all, the jobs market is slowing coming back, while
housing is also on the upswing, making consumers feel better
about their financial situations. Furthermore, oil prices are
staying at a moderate level-thanks in part to a strong dollar-so
consumers have plenty of extra cash to spend on discretionary
products and services.

In fact, recent consumer sentiment surveys have been extremely
positive with the latest reading surging past expectations. The
initial reading in the University of Michigan survey came in at
83.7, a huge surge from the prior level of 76.4 and well above
the consensus estimate of 78.0 (read
Make the Ultimate Consumer Bet with the Gaming
ETF
).

Given this surprisingly positive data and the slowly improving
economy, there could still be plenty of time to look at consumer
stocks to take advantage of the strong trends in the space. While
looking at individual companies is certainly an option, a focus
on top ranked consumer
ETFs
could be a lower risk way to tap into the same broad trends.

Top Ranked Consumer ETFs in Focus

This approach not only takes into account the Zacks Rank on
the individual securities, but also ETF specific factors such as
bid ask spreads and expense ratios, in order to get a full
picture of the fund and its investment potential. Using this
technique, we have found a number of ETFs that have the top Zacks
ETF Rank of 1 or 'Strong Buy' in the consumer sector (see
all the
Top
Ranked ETFs
).

While any of these top ranked ETFs look likely to outperform,
the following three funds could be the best choices to tap into
the space. That is because this trio has strong momentum
over the past one year time frame, and potentially superior
weighting methodologies which could allow this group to continue
leading the consumer space higher in the months ahead.

This underappreciated ETF offers up exposure across the
consumer discretionary market, holding over 80 companies in its
portfolio. Expenses are a bit steep at 50 basis points a year,
while volume is a little light, though the liquid nature of the
underlying holdings should keep bid ask spreads tight.

The equal weighting also helps to ensure that small and mid
cap securities are better represented, as large caps only take up
about 60% of assets, compared to nearly 90% for
XLY
. In terms of industries, specialty retail takes the top spot at
roughly one-fourth of the total, followed by modest allocations
to department stores, and then apparel and luxury goods (read
Equal Weight and #1 Rank: A Winning ETF
Combo?
).

The ETF currently has a Zacks ETF Rank of 1 or 'Strong Buy',
suggesting that it is positioned to outperform similar
competitors. This has certainly been the case as of late, as the
ETF has gained over 38% in the trailing one year time frame,
easily outpacing other broad sector funds, and the S&P 500 as
well.

For a slightly more 'active' choice in the consumer
discretionary world, investors should consider FXD for quality
exposure. The fund is a bit pricey though, as it charges 70 basis
points a year in fees, though it has solid volume of about
160,000 shares a day.

The reason for this extra cost is the AlphaDEX methodology,
which seeks to narrow down the consumer market to only the best
positioned companies. It ranks stocks in the space by various
growth and value factors, eliminating the bottom ranked 25% of
stocks.

Still, roughly 125 stocks are in this fund's basket, with
media and specialty retail taking the top two spots. From a
market cap look, large caps only take up about one-third of the
total, so this could be a somewhat volatile fund as well (see
3 ETFs with Incredible Diversification
).

The product does have a top Zacks ETF Rank of 1 or
'Strong Buy' though, and it also appears poised to lead the
market higher. This has been the trend in this product for much
of the recent trading sessions too, as the fund has soared by
close to 37% in the past one year time frame.

For a more concentrated play on the consumer sector, investors
could look to XRT and its retail focused portfolio. The fund
holds about 100 companies in its basket, sees incredible volume,
and is also a low cost choice at just 35 basis points a year.

Its equal weight focus also ensures that no single company
dominates the risk return profile of the ETF, and that mid and
small caps are once again well represented. In fact, no single
company makes up more than 1.7% of assets, while large caps
account for just under a quarter of the total from a cap
perspective.

This product also has a top Zacks ETF rank, suggesting that it
too is poised to outperform. The fund has certainly done this so
far in 2013, as it has moved higher by over 24% YTD and 36% in
the trailing one year time frame.

Bottom Line

There are some very good reasons to be a buyer of consumer
stocks at this point in time. The economy is seemingly back on
track while important data points-such as consumer sentiment,
home prices, and the jobs market-are all improving (also read
Why I Hate Volatility ETFs and Why You Should
Too
).

This suggests that even with the big run that some consumer
ETFs have had so far this year, the space could be poised to move
higher in the back half of 2013. So, consider taking a closer
look at a few of the top Ranked ETFs in this sector for excellent
exposure that could potentially provide investors with some more
outperformance in the coming months as well.

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